PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements
January 31, 2019
(Unaudited)
PASSUR Aerospace, Inc. (“PASSUR” or the “Company”), a New York corporation founded in 1967, is a business intelligence
company, providing predictive analytics and decision support technology for the aviation industry primarily to improve the operational performance and cash flow of airlines and the airports where they operate. PASSUR uses big data, within the
aviation intelligence platform and a suite of web-based solutions that address the aviation industry’s intractable and costly challenges, including, but not limited to, the underutilization of airspace and airport capacity, delays, cancellations,
and diversions. The Company’s technology platform is supported by its Aviation Intelligence Center of Excellence, a team of subject matter experts with extensive experience in airline, airport, and business aviation operations, finance, air traffic
management, systems automation, and data visualization, with specific expertise in the operational and business needs, requirements, objectives, and constraints of the aviation industry.
PASSUR’s mission is to improve global air traffic efficiencies by connecting the world’s aviation professionals onto a
single aviation intelligence platform, making PASSUR an element in addressing the aviation industry’s system-wide inefficiencies. We are an aviation intelligence company that makes air travel more predictable, gate-to-gate, by using predictive
analytics generated from our own big data – to mitigate constraints for airlines and their customers.
PASSUR’s information solutions are used by the five largest North American airlines, more than 60 airport customers,
including 20 of the top 30 North American airports (with PASSUR solutions also used at the remaining ten airports by one or more airline customers), over a hundred business aviation customers, and the U.S. government.
PASSUR provides data aggregation and consolidation, information, decision support, predictive analytics, collaborative
solutions, and professional services. To enable this unique offering, PASSUR owns and operates the largest commercial passive radar network in the world that updates flight tracks every 1 to 4.6 seconds, powering a proprietary database that is
accessible in real-time and delivers timely, accurate information and solutions via PASSUR’s industry-leading algorithms and business logic included in its products.
Solutions offered by PASSUR help to ensure flight completion, covering the entire flight life cycle, from gate to gate,
and result in reductions in overall costs and carbon emissions, while helping to maximize revenue opportunities, as well as improving operational efficiency and enhancing the passenger experience.
PASSUR’s commercial solutions give aviation operators the ability to optimize performance in today’s air traffic
management system, while also achieving Next Generation Air Transportation System (“NextGen”) and Single European Sky ATM Research objectives.
PASSUR integrates data from multiple sources, including its independent network of surveillance sensors installed
throughout North America creating coast to coast coverage, as well as locations in Europe and Asia; government data; customer data; and data from third party partners. PASSUR’s sensors receive aircraft and drone signals in Mode A, C, S, and
Automatic Dependent Surveillance-Broadcast (“ADS-B”), providing position, altitude, beacon code, and tail number, among other information. PASSUR receives signals from aircraft that, when combined with its historical database of aircraft and
airport behavior, including information recorded by its network over the last 15 years, allow the Company to know more about what has happened historically and what is happening in real-time. In addition, the historical database allows the Company
to predict how aircraft, the airspace, and airports are going to perform, and more importantly, how the aircraft, the airspace, and airports should perform.
2. Basis of
Presentation and Significant Accounting Policies
The consolidated financial information contained in this quarterly report on Form 10-Q represents interim
condensed financial data and, therefore, does not include all footnote disclosures required to be included in financial statements prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Such footnote
information was included in the Company's Annual Report on Form 10-K for the year ended October 31, 2018, filed with the Securities and Exchange Commission (“SEC”); the consolidated financial data included herein should be read in conjunction with
that report. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s consolidated financial
position as of January 31, 2019, and its consolidated results of operations for the three months ended January 31, 2019, and 2018.
The results of operations for the interim period stated above are not necessarily indicative of the results of operations
to be recorded for the full fiscal year ended October 31, 2019.
Certain financial information in the footnotes has been rounded to the nearest thousand for presentation
purposes.
Liquidity
The Company’s current assets exceeded current liabilities, excluding deferred revenue by $2,021,000 as of January 31,
2019. The note payable to a related party, G.S. Beckwith Gilbert, the Company’s significant shareholder and Chairman, was $6,960,000 at January 31, 2019, with a maturity of November 1, 2020. The Company’s stockholders’ equity was $2,902,000 at
January 31, 2019. The Company had a net loss of $934,000 for the three months ended January 31, 2019.
If the Company’s business does not generate sufficient cash flows from operations to meet its operating cash requirements,
the Company will attempt to obtain external financing on commercially reasonable terms. However, the Company has received a commitment from G.S. Beckwith Gilbert, dated March 18, 2019, that if the Company, at any time, is unable to meet its
obligations through March 18, 2020, G.S. Beckwith Gilbert will provide the Company with the necessary continuing financial support to meet such obligations. Such commitment for financial support may be in the form of additional advances or loans to
the Company, in addition to the deferral of principal and/or interest payments due on the existing loans, if deemed necessary. The note payable is secured by the Company’s assets.
Principles of Consolidation
The consolidated financial statements include the accounts of PASSUR and its wholly-owned subsidiary. All
significant inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The
Company’s significant estimates include those related to revenue recognition, stock-based compensation, software development costs, the PASSUR Network and income taxes. Actual results could differ from those estimates.
Revenue Recognition Policy
The Company recognizes revenue in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards
Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers ("Topic 606")
.
The Company accounts for a customer contract when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights can be identified, payment terms can be
identified, the contract has commercial substance, and it is probable the Company will collect substantially all of the consideration to which it is entitled.
The Company derives revenue primarily from subscription-based, real-time decision and solution information
and professional services. Revenues are recognized when control of these services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.
The Company determines revenue recognition through the following steps:
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Identification of the contract, or contracts, with a customer;
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Identification of the performance obligations in the contract;
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●
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Determination of transaction price;
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Allocation of transaction price to performance obligations in the contract; and
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Recognition of revenue when, or as, the Company satisfies a performance obligation.
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The Company recognized
revenue during the three months ended January 31, 2019, of $3,656,000 under Topic 606, which was not materially different from what would have been recognized under
Accounting Standards Codification ("ASC") Topic 605,
Revenue Recognition
("Topic 605")
. The Company recorded an addition to opening accumulated deficit and a reduction to deferred revenue of approximately $66,000, respectively, as of November 1,
2018 due to the impact of adopting Topic 606.
A. Nature of performance obligations
Subscription services revenue
Subscription services revenue is comprised of cloud-based subscription fees that provide the customer the
right to access the Company’s software and receive support and updates, if any, for a period of time. The Company has determined such access represents a stand-ready service provided continually throughout the contract term. As such, control and
satisfaction of this stand-ready performance obligation is deemed to occur over time. The Company’s subscription contracts include a fixed amount of consideration that is recognized ratably over the non-cancelable contract term, beginning on the
date that access is made available to the customer. The passage of time is deemed to be the most faithful depiction of the transfer of control of the services as the customer simultaneously receives and consumes the benefit provided by the
Company’s performance. Subscription contracts are generally one to three years in length, billed either monthly, quarterly or annually, typically in advance, which coincides with the terms of the agreement. The Company’s subscription contracts do
not have a significant financing component and customer invoices are typically due within 30 days. There is no significant variable consideration related to these arrangements. Amounts that have been invoiced are recorded in accounts receivable and
in deferred revenue or revenue, depending on whether transfer of control to customers has occurred.
Professional services revenue
Professional services primarily consist of value assessments and customer training services. Payment for
professional services is generally a fixed fee or a fee based on time and materials. The obligation to provide professional services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as the
Company satisfies its performance obligations. For professional services, revenue is recognized by measuring progress toward the complete satisfaction of the Company’s obligation. Progress for services that are contracted for a fixed price is
generally measured based on hours incurred as a portion of total estimated hours, and as a practical expedient, progress for services that are contracted for time and materials is generally based on the amount the Company has the right to invoice.
Professional services contracts are generally one year or less in length, billed either in advance, upon pre-defined milestones or as services are rendered, which coincides with the terms of the agreement. The Company’s professional service
contracts do not have a significant financing component and customer invoices are typically due within 30 days.
Material rights
Contracts with customers may include material rights which are also performance obligations. Material
rights primarily arise when the contract gives the customer the right to renew subscription services at a discounted price in the future. This may occur from time to time when the Company’s contracts provide an implicit discount as the customer
pays a nonrefundable up-front fee in connection with the initial services contract that it does not have to pay again in order to renew the service. These non-refundable up-front fees are not related to any promised service that the customer
benefits from other than providing access to the subscription service. Revenue allocated to material rights is recognized when the customer exercises the right over the estimated renewal period of five years or when the right expires. If exercised
by the customer, the amount previously deferred for the material right is included in the transaction price of the renewal contract and allocated to the services included in that contract. If expired, revenue is recognized as subscription services
revenue in the period the right expired. If the up-front fees do not provide the customer with a material right, then the amount is included in the transaction price of the initial services contract and allocated to the performance obligations in
that contract.
Contracts with Multiple Performance Obligations
Some of the Company’s contracts with customers contain multiple distinct performance obligations. For
these contracts, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The standalone selling price reflects the price the Company would charge for a specific service if it was
sold separately in similar circumstances and to similar customers. The Company maximizes the use of directly observable transactions to determine the standalone selling prices for its performance obligations. For subscription services, the Company
separately determines the standalone selling prices by type of solution and customer demographics. For professional services, the Company separately determines standalone selling price by type of services.
Other policies and judgments
The commissions that the Company pays for obtaining a contract with a customer are conditional on future
service provided by the employee. Therefore, since these costs are not incremental solely based on obtaining a contract, the Company does not defer any commission costs.
The disaggregation of revenue by customer and type of performance obligation is as follows:
Revenue by customer:
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Three Months
Ended
January 31,
2019
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Airlines
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$
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2,218,000
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Airports
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1,423,000
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Other
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15,000
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Total Revenue
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$
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3,656,000
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Revenue by type of performance obligation:
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Three Months
Ended
January 31,
2019
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Subscription services
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$
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3,596,000
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Professional services
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60,000
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Total Revenue
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$
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3,656,000
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The opening and closing balances of the
Company's accounts receivable, unbilled receivables, and deferred revenues are as follows:
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Accounts
Receivable
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Unbilled
Receivable
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Deferred
Revenue
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Balance at November 1, 2018
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$
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1,175,000
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$
|
12,000
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$
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3,191,000
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|
|
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Balance at January 31, 2019
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$
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978,000
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$
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47,000
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$
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5,707,000
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The difference in the opening and closing balances of the Company’s unbilled receivable and deferred revenue primarily
results from the timing difference between the Company’s performance and the customer’s payment.
Deferred revenue includes amounts billed to customers for which the revenue recognition criteria has not yet been met.
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Company’s subscription services and, to a lesser extent, professional services. Deferred revenue is recognized as the Company satisfies
its performance obligations. The Company generally invoices its customers in monthly, quarterly or annual installments for subscription services. Accordingly, the deferred revenue balance does not generally represent the total contract value of
annual or multi-year, non-cancelable subscription arrangements. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent. The amount
of revenue recognized during the three months ended January 31, 2019 that was included in the deferred revenue balance at November 1, 2018 was $2,325,000.
Unbilled accounts receivable relates to the delivery of subscription and professional services for which the related
billings will occur in a future period.
D. Transaction Price Allocated to the Remaining Performance Obligation
The following table discloses the aggregate amount of the transaction price allocated to the remaining
performance obligations as of the end of the reporting period, and when the Company expects to recognize the revenue.
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12 months
or less
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Greater than
12 months *
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Subscription services
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$
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8,235,000
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$
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2,255,000
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Professional services
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$
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40,000
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$
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24,000
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Material rights
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$
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175,000
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$
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312,000
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*Approximately 97% of these amounts are expected to be recognized between 12 and 36 months.
The table above includes amounts billed and not yet recognized as revenue, as well as, unrecognized future
committed billings in customer contracts and excludes future billing amounts for which the customer has a termination for convenience right in their agreement.
Cost of Revenues
Costs associated with subscription and maintenance revenues consist primarily of direct labor,
depreciation of PASSUR and Surface Multilateration (“SMLAT”) Network Systems (both collectively, the “PASSUR Network”), amortization of capitalized software development costs, communication costs, data feeds, travel and entertainment, and
consulting fees. Also, included in cost of revenues are costs associated with upgrades to PASSUR and SMLAT Systems necessary to make such systems compatible with new software applications, as well as the ordinary repair and maintenance of existing
PASSUR and SMLAT Systems. Additionally, cost of revenues in each reporting period is impacted by: (1) the number of PASSUR and SMLAT Systems added to the PASSUR Network, which includes the cost of production, shipment, and installation of these
assets, which are capitalized to the PASSUR Network; and (2) new capitalized costs associated with software development projects. Both of these are referred to as “Capitalized Assets” and are depreciated and/or amortized over their respective
useful lives and charged to cost of revenues.
On December 22, 2017 the U.S. government enacted comprehensive tax reform commonly referred to as the Tax
Cuts and Jobs Act (“TCJA”). Under Accounting Standards Codification (“ASC”) 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. The TCJA made broad and complex changes to the
U.S. tax code, including, but not limited to: (1) reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018; (2) changed the rules related to uses and limitations of net operating loss carryforwards created in tax years
beginning after December 31, 2017; (3) accelerated expensing on certain qualified property; (4) created a new limitation on deductible interest expense to 30% of tax adjusted EBITDA through 2021 and then 30% of tax adjusted EBIT thereafter; (5)
eliminated the corporate alternative minimum tax; and (6) imposed further limitations on the deductibility of executive compensation under IRC §162(m) for tax years beginning after December 31, 2017.
As the reduction in the U.S. federal corporate tax rate is administratively effective on January 1, 2018,
our blended U.S. federal tax rate for the fiscal year ended October 31, 2018 was approximately 23.2%. The U.S. federal corporate tax rate for the fiscal year ended on and after October 31, 2019 is 21%. The Company recorded an income tax benefit in
connection with the TCJA, that was offset by reducing the Company’s valuation allowance on its deferred tax assets and liabilities. The Company completed its accounting for the TCJA as of October 31, 2018.
The Company’s provision for income taxes consists of federal and state taxes, as applicable, in amounts
necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. For both the three months ended January 31, 2019 and 2018, the Company recorded an income tax provision (benefit) of
zero. The Company is projecting that its annual effective tax rate for the three months ended January 31, 2019 is 0% as the Company’s net deferred tax assets are not realizable on a more-likely-than-not basis.
Accounts Receivable
The Company has a history of successfully collecting all amounts due from its customers under the original
terms of its subscription agreements without making concessions. The Company records accounts receivables for agreements where amounts due from customers are contractually required and are non-refundable. The carrying amount of accounts receivables
is reduced by a valuation allowance that reflects the Company’s best estimate of the amounts that will not be collected. Net accounts receivable is comprised of the monthly, quarterly, or annual committed amounts due from customers pursuant to the
terms of each respective customer’s agreement. Account receivable balances include amounts attributable to deferred revenues. The Company’s accounts receivable balances included $47,000 of unbilled receivables associated with contractually
committed services provided to existing customers during the three months ended January 31, 2019, which will be invoiced subsequent to January 31, 2019. As of October 31, 2018, the Company’s accounts receivable balance included $12,000 of unbilled
receivables associated with contractually committed services provided to existing customers.
The provision for doubtful accounts was $159,000 as of January 31, 2019 and October 31, 2018,
respectively. In addition to reviewing delinquent accounts receivable, the Company considers many factors in estimating its reserve, including historical data, experience, customer types, credit worthiness, and economic trends. The Company monitors
its outstanding accounts receivable balances and believes the provision is adequate.
PASSUR Network
The PASSUR Network is comprised of PASSUR and SMLAT Systems, which includes the direct production,
shipping, and installation costs incurred for each PASSUR and SMLAT System, which are recorded at cost, net of accumulated depreciation. The Company capitalized $61,000 of PASSUR Network costs, for the three months ended January 31, 2019.
Additionally, the Company purchased parts for the PASSUR Network totaling $1,000 and used $9,000 of parts for repairs during the three months ended January 31, 2019.
For the three months ended January 31, 2018, the Company capitalized $67,000 of PASSUR Network costs.
Additionally, the Company purchased parts for the PASSUR Network totaling $52,000 and used $4,000 of parts for repairs during for the three months ended January 31, 2018.
Depreciation expenses related to the Company-owned PASSUR Network was $205,000 and $176,000 for the three
months ended January 31, 2019 and 2018, respectively. Depreciation is charged to cost of revenues and is recorded using the straight-line method over the estimated useful life of the asset, which is estimated at five years for SMLAT Systems and
seven years for PASSUR Systems.
The net carrying balance of the PASSUR Network as of January 31, 2019, and October 31, 2018, was
$4,649,000 and $4,801,000, respectively. Included in the net carrying balance as of January 31, 2019 and October 31, 2018, were parts and finished goods for the PASSUR Network totaling $1,869,000 and $1,892,000, respectively, which have not yet
been installed. PASSUR Network assets which are not installed are carried at cost and not depreciated until installed.
Capitalized Software
Development Costs
The Company follows the provisions of ASC 350-40, “Internal Use Software” (“ASC 350-40”). ASC 350-40
provides guidance for determining whether computer software is internal-use software, and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes the costs
incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software are capitalized if it is determined that these upgrades or enhancements add additional functionality to the software. Costs
incurred to improve and support products after they become available are charged to expense as incurred.
The Company capitalized $696,000 and $548,000 of software development costs for the three months ended
January 31, 2019 and 2018, respectively. The Company amortized $520,000 and $519,000 of capitalized software development costs for the three months ended January 31, 2019 and 2018, respectively. The Company records amortization of the software on
a straight-line basis over the estimated useful life of the software, typically over five years within “Cost of Revenues”.
Long-Lived Assets
The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an
asset may not be recoverable. Impairment is recognized to the extent the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value. Assets to be disposed of are carried at the lower
of their carrying value or fair value, less costs to sell. The Company evaluates the periods of amortization continually in determining whether later events and circumstances warrant revised estimates of useful lives. If estimates are changed, the
unamortized costs will be allocated to the increased or decreased number of remaining periods in the asset’s revised life.
Deferred Tax Asset
Each reporting period, the Company assesses the realizability of its deferred tax assets to determine if
it is more-likely-than-not that some portion, or all, of the deferred tax asset will be realized. The Company considered all available positive and negative evidence including the reversal of existing taxable temporary differences, projected
future taxable income, tax planning strategies and recent financial operating results. The ultimate realization of a deferred tax asset is ultimately dependent on sufficient taxable income within the available carryback and/or carryforward periods
to utilize the deductible temporary differences. Based on the weight of available evidence including recent financial operating results, the Company determined its net deferred tax assets are not realizable on a more-likely-than-not basis and that
a valuation allowance is required against its net deferred tax assets.
At October 31, 2018, the Company had available federal net
operating loss carryforwards of $12,780,000, of which $4,715,000 are indefinite lived and $8,065,000 will expire in various tax years from fiscal year 2022 through fiscal year 2038.
Fair Value of Financial Instruments
The recorded amounts of the Company’s cash, receivables, and accounts payables approximate their fair
values principally because of the short-term nature of these items. The fair value of related party debt is not practicable to determine due primarily to the fact that the Company’s related party debt is held by its Chairman and significant
shareholder, and the Company does not have any third-party debt with which to compare.
Additionally, on a recurring basis, the Company uses fair value measures when analyzing asset impairments.
Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are
present, and the review indicates that the assets will not be fully recoverable based on the undiscounted estimated future cash flows expected to result from the use of the asset, their carrying values are reduced to estimated fair value.
Net Loss per Share Information
Basic net loss per share is
computed based on the weighted average number of shares outstanding. Diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the effect of common shares issuable upon exercise of stock options, using
the treasury stock method in periods in which they have a dilutive effect.
The Company’s 2009 Stock Incentive Plan, which expired on February 24, 2019, allows for a cashless exercise.
Shares used to calculate net loss per share are as follows:
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For the three months ended
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January 31,
|
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2019
|
|
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2018
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Basic Weighted average shares outstanding
|
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7,696,091
|
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|
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7,696,091
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Effect of dilutive stock options
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-
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-
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Diluted weighted average shares outstanding
|
|
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7,696,091
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|
|
|
7,696,091
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|
|
|
|
|
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Weighted average shares which are not included in
the calculation of diluted net income per share
because their impact is anti-dilutive.
These shares
consist of stock options.
|
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1,734,500
|
|
|
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1,624,000
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Stock-Based Compensation
The Company follows FASB ASC 718, “Compensation-Stock Compensation,” which requires the measurement of compensation cost
for all stock-based awards at fair value on the date of grant, and recognition of stock-based compensation expense over the service period for awards expected to vest. The fair value of stock options was determined using the Black-Scholes valuation
model. Such fair value is recognized as an expense over the service period, net of forfeitures. Stock-based compensation expense was $156,000 and $171,000 for the three months ended January 31, 2019 and 2018, respectively. Stock-based compensation
is primarily included in selling, general, and administrative expenses.
Recent Accounting Pronouncements Adopted
In May 2014, the FASB issued Topic 606
.
Topic 606 supersedes the revenue recognition requirements in Topic 605, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the
considerations to which the entity expects to be entitled to in exchange for those goods or services. Topic 606 also includes Subtopic 340-40,
Other
Assets and Deferred Costs - Contracts with Customers
, which requires the deferral of incremental costs of obtaining a contract with a customer.
On November 1, 2018, the Company adopted Topic 606 using the modified retrospective transition method which resulted in an
adjustment to retained earnings for the cumulative effect of applying the standard to all contracts not completed as of the adoption date. The comparative information has not been restated and continues to be reported under the accounting standards
in effect for those periods. Revenue recognition remained substantially unchanged following adoption of Topic 606 and therefore the adoption of Topic 606 did not have a material impact on revenues. The primary impact of adopting Topic 606 relates
to the accounting for nonrefundable up-front fees. The Company recognized revenue during the three months ended January 31, 2019, of $3,656,000 under Topic 606, which was not materially different from what would have been recognized under Topic
605. The Company recorded an addition to opening accumulated deficit and a reduction to deferred revenue of approximately $66,000, respectively, as of November 1, 2018 due to the impact of adopting Topic 606.
In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation: Topic 718” — Scope of
Modification Accounting (“ASU 2017-09”), to clarify when to account for a change in the terms or conditions of a share-based payment award as a modification. Under the new standard, modification is required only if the fair value, the vesting
conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. The Company adopted this guidance during the quarter ended January 31, 2019, using the prospective method, with no
material impact to its consolidated financial statements and related disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB
issued ASU 2016-02, which amends the ASC and creates Topic 842, Leases (“Topic 842”). Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous GAAP on the
balance sheet. This guidance is effective for annual periods beginning after December 15, 2018, which will be effective for the Company beginning November 1, 2019, and early adoption is permitted.
The Company's preliminary analysis
indicates that the Company will recognize a liability for remaining lease payments and a right-of-use asset related to the Company's operating lease covering its corporate office and other facilities that expires through various dates through June
2023. The Company is in the initial stages of evaluating the effect of the standard on the Company's financial statements.
3. Notes Payable –
Related Party
The Company has a note payable to G.S. Beckwith Gilbert, the Company’s Chairman and significant stockholder, of $6,960,000
(the “Existing Gilbert Note”) as of January 31, 2019. The Existing Gilbert Note bears a maturity date of November 1, 2020, with an annual interest rate of 9.75%. Interest payments are due by October 31
st
of each fiscal year. During the
three months ended January 31, 2019, Mr. Gilbert loaned the Company an additional $910,000 (which amount is included in the outstanding amount of the Existing Gilbert Note described in the first sentence of this paragraph). The Company has paid
interest incurred on the Existing Gilbert Note through January 31, 2019, totaling $168,000. The Existing Gilbert Note is secured by the Company’s assets.
On January 28, 2019, the Company entered into a Fifth Debt Extension Agreement with G.S. Beckwith Gilbert, the Company’s
Chairman and significant stockholder, effective January 28, 2019, pursuant to which the Company and Mr. Gilbert agreed to modify certain terms and conditions of the existing debt agreement with Mr. Gilbert (the “Existing Gilbert Note”). The
maturity date of the Existing Gilbert Note was due on November 1, 2019, and the total amount of principal and first quarter of fiscal year 2019 interest due and owing as of January 28, 2019, was $7,122,000. Pursuant to the Fifth Debt Extension
Agreement, the Company issued a new note to Mr. Gilbert in the principal amount of $6,960,000 (the “Fifth Replacement Note”) in exchange for the Existing Gilbert Note and the Company agreed to pay the first quarter of fiscal year 2019 accrued
interest under the Existing Gilbert Note as of January 28, 2019, in an amount equal to $162,000, at the time and on the terms set forth in the Existing Gilbert Note. Under the terms of the Fifth Replacement Note, the maturity date was extended to
November 1, 2020, and the annual interest rate remained at 9 3/4%. Interest payments under the Fifth Replacement Note shall be made annually on October 31st of each year. The Fifth Replacement Note is secured by the Company’s assets.
The Company evaluated its financial position as of January 31, 2019, including an operating loss of
$766,000 and working capital deficit of $3,325,000 and has requested and received a commitment from G.S. Beckwith Gilbert, dated March 18, 2019, that if the Company, at any time, is unable to meet its obligations through March 18, 2020, Mr. Gilbert
will provide the Company with the necessary continuing financial support to meet such obligations. Such commitment for financial support may be in the form of additional advances or loans to the Company, in addition to the deferral of principal
and/or interest payments due on the existing loans, if deemed necessary.